ANALYSIS-Australia's best 2011 stock rides mineral sands boom

China may have a lock on exotic rare earths that go into mobile phones and stealth fighters, but real money is also being made in the more mundane world of Australian mineral sands that go into bathroom tiles and pacemakers.

Australia's best performing stock this year is the mineral sands miner
Iluka Resources
, which has seen its shares jump nearly five-fold in the past 17 months, a gain that has some investors saying it might be too late to jump on the mineral sands bandwagon.

Investors who don't hold shares in the $7.2 billion ($US7.6 billion) company think the stock may be starting to reflect too much exuberance over how high mineral sands product prices will go and how long they will stay strong.

"Anyone who's looking at the stock longer term would have to be a little more cautious," said Peter Chilton, an analyst at Constellation Capital Management. "I don't think the near-term prices are sustainable."

While Iluka is the world's top producer of zircon, with about a third of the global market, and a leading producer of titanium dioxide products, other companies hold mineral sands resources yet to be developed, which could offer investors a way to tap the boom.

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Those closest to getting new projects underway, such as Mineral Deposits Ltd , Base Resources and Gunson Resources , stand to benefit from strong prices if the boom lasts as long as analysts now forecast.

For investors, Iluka has an advantage over smaller companies building new mines because its development costs were lower. Returns for newer players will not be as fat because they face higher costs.

It is only now, with product prices taking off, that mine developments on the drawing boards are starting to look viable. But it will take at least three years for new mines to start producing.

"We do expect to see existing operators like Iluka make stronger margins on stronger prices because they've spent the capital required," said Andrew Pedler, an analyst at broker Wilson HTM.

Iluka's product price hikes last week sent its shares up to a record $17.75 and sparked the latest round of upgrades from analysts, with the most bullish price target on the stock raised to $24.

That would give investors a further 42 percent gain on Friday's close. The stock has nearly doubled in value so far this year, making it the best performer in a broader market down 3.4 per cent.

Even after the stellar run, 10 out of 14 brokers rate the stock as a buy or strong buy, with only one underperform rating.

But analysts are wary of sounding too bullish about an industry that is not as transparent as other commodity markets.

"In all probability there is some further upside in commodity prices, and therefore some further upside in share prices," said Pedler.

Analysts' forecasts have struggled to keep up with price hikes over the past year for the key mineral sands products -- zircon, ilmenite, rutile and synthetic rutile -- that are used in everything from paints, bathroom wares and kitchen tiles to nuclear reactors and cardiac pacemakers.

NEW PRICING REGIME

Producers, led by Iluka, have been able to push through massive price increases as supplies have struggled to keep up with demand, following the global financial crisis, when companies shut down plants.

Steep price increases for zircon are being driven by soaring demand from China, where acres of tiles and bathroom wares are needed to fill new cities full of high-rise apartment buildings.

"The sector appears to be entering a completely new pricing regime where pricing power lies firmly in the hands of the suppliers," said Philip Murphy, managing director of industry consultant, TZMI Minerals, in an e-mail to Reuters.

Iluka last week said it expects to achieve a 35-40 per cent increase to about $US2200 a tonne in zircon prices for the third quarter over the second quarter.

Demand for titanium dioxide feedstocks, driven by the United States and Europe as well as China, has picked up following the global financial crisis.

Iluka also announced 70-75 per cent increases in rutile prices for the second half of 2011 over the first half to around $US13280 per tonne and a similar hike for synthetic rutile.

"TZMI expects to see further considerable price increases for feedstocks and zircon over the medium term as legacy contracts come up for renewal and prior to any significant new supply entering the market from late 2013," Murphy said.

RBC Capital Markets has forecast zircon prices will stay above $US2000 a tonne through 2014 and sees rutile prices holding above $US1000 a tonne through 2015, both at more than double last year's price.

Iluka does not comment on price forecasts and TZMI's Murphy declined to comment, except to say that up to now analysts' forecasts have been conservative.

The most reassuring factor for mineral sands miners is that their customers, led by DuPont and Huntsman Corp, expect to be able to pass the higher ore costs through to end users, like paint makers, amid strong demand.

"We believe that though there are fast escalating ore price increases that will be coming to our industry, we believe that...we'll be able to absorb these without having a detrimental effect to our earnings going forward in 2011," Huntsman CEO Peter Huntsman said at a conference last week.